Why It's Wrong To Right Off Russia Now

ByDavid Hoffman

September 19, 1999

In the colossal Soviet military machine, Viktor Vyshinsky worked in fluid dynamics at a secret aviation institute, testing missiles and warplanes. But when the Soviet Union came to an end, he felt trapped, he recalled, "like a miner deep in the shaft." He climbed to the surface to try to make sense of capitalism and the new Russia. Vyshinksy, a scientist, set up a pollution control system for a local government. He didn't get paid. Then he tried a commercial project for timber drying. No luck. After that came his attempt to predict floods. "Nothing actually worked out from that period," he told me. But Vyshinsky did not give up--not long ago, he was working on a mathematical model to predict turbulence created by airplanes at commercial airports.

Vyshinsky's doggedness holds a lesson for those who are suddenly worried that the great Russian transition to market capitalism and democracy has somehow failed. It hasn't. Russians are picking themselves up off the floor every day, plunging back again and again into the unknown, despite the wrenching disappointments that they and the world have witnessed here in the last few years.

The experiment--and it is just that, a grand and unprecedented experiment--is in trouble, that's clear. From the outset, it has been burdened by the legacy of Russian authoritarianism, by greed and avarice, by utter incompetence in national leadership, and by the unimaginable problems of changing the mind-set of a whole people, breaking free of generations of passivity and paternalism, and doing it quickly.

Now comes a spate of headlines in the United States and Europe about allegations of money laundering, alleged bribery involving high-level Kremlin officials and the flight of Russia's precious capital. But it is strange to hear the alarmist tone in the West about the Russian "kleptocracy" and "gangster state," and to listen to the debate about who "lost" Russia. It is strange because Russia's woes have been staring us in the face for nearly a decade. In fact, the deeper these woes become, the greater the need for the world's most successful experiment in market capitalism and democracy to show the way. What really baffles me is the notion that the United States should disengage from Russia because things have not, in a few short years, turned out to be our idea of Main Street.

Russia is not going to be Main Street for a long time. But the United States has a huge obligation--and national interest--to see that the Russian experiment advances and to find ways to repair the damage it has already suffered. It may surprise prospering Americans, but the truth is that the Cold War is not yet really won. Our longed-for dividend of a less dangerous world will not be secure if Russia goes off the tracks.

Russia today is a failing state--its military is a wreck, its recent wave of terrorism has created panic and uncertainty, its tax collection is a disaster, and it is not turning itself into a market democracy very well. Moreover, Russia is suffering a debilitating and degenerative disease. What little capital it has to become a capitalist country is being spirited abroad. For a decade, capital has been fleeing at an alarming rate. The suspicions of money laundering and possible huge money flows through the Bank of New York are not the first, or the last, of this river of riches that has left Russia.

However, the past 15 years--since the dawn of perestroika--have taught an important lesson: Transition takes time and patience, far more than anyone thought when the Berlin Wall fell. The late economist Ed Hewett noted wisely that sometimes a misstep is part of a larger movement forward. For example, last year's devaluation of the ruble and default on Russia's domestic debt were not disasters. Policymakers made big mistakes, but, in retrospect, the crash itself was more of a correction than a cataclysm.

It's just plain wrong to write off Russia as a hopeless failure. Have we run out of energy and patience for the job of a lifetime, making sure the values that we fought for in the Cold War are truly and firmly planted here? It's time to wake up and think about getting Russia right. In fact, it's easy to forget how far Russia has already come. Not too long ago, a foreign visitor--even a package from a foreigner--aroused fear and suspicion, and people spoke openly only in their kitchens. Today Russia is a cacophony of political voices, and both literature and art are relatively free. And despite the stress of recent years, the Russian transition never degenerated into mass violence.

The criticism that Russia has become a "gangster state" is terribly one-dimensional. The transition has many fronts, and it has been an inchoate mess on all of them. The last Soviet leader, Mikhail Gorbachev, greatly advanced political freedom but stumbled repeatedly in lame attempts to tinker with the socialist economy. Russian President Boris Yeltsin at first bravely broke the grip of the old state, but then checked out of the business of building something new in its place. The fundamental problems of constructing a civil society and rule-of-law state have been carelessly ignored and may well have to wait for another generation.

What is amazing to me every day is not the lack of capitalism in Russia but the utter madness and zealousness of it. Russians are rushing headlong into a new world for which they have few rules. Instead of a sodden mass longing to go back to socialism, the country is a bewildering, scary and warped buy-sell kind of place. The "market" creates perverse incentives--scrap metal thieves, for example, raid warplanes and power stations in search of electronic boards with precious metals they can steal, melt down and sell. The Russians call it dikiy or wild capitalism--wild as in the untamed jungle.

Americans should hardly be throwing up their hands in shock and surprise at the ascent of robber-baron capitalism in Russia. We know it well. We had it once, too. In the industrial expansion that followed the Civil War, there was a hunger for new capital, and that gave rise to tycoons such as J. Pierpont Morgan. He became a powerful turn-of-the-century middleman between capital, both foreign and domestic, and America's expanding industry. Eventually, the magnates' immense power dissipated as our markets grew more mature. The wild capitalism gave rise to a more civilized kind. But this fundamental shift took decades.

Russia has been trying to build market capitalism for only eight years. In one sense, Russia faces the same problem that once confronted the United States--a hunger for capital. There is no way the rotting factories of the Soviet Union can be retooled and restructured without new capital. But there are differences: The American robber barons, for all their greed, built something and left enormous amounts of philanthropy. Russia lacks the rule of law that has been one of America's enduring national strengths. And, when the new Russian state was born, the lion's share of property--the massive stock of factories, mines and refineries--was not the result of individual initiative, but rather came from the old state. The immensely important job of finding owners for that property who will rebuild it, manage it and reinvest profits is still at the core of Russia's troubles.

In the latest controversy, much of the harshest criticism has been directed at Russia's robber barons, known here as the oligarchs, a group of financiers and magnates who dominate the weakening state. These men did not just parachute into Russia. They were a product of their turbulent times. Unfortunately, the incentive of those times was to make "easy money," to reap fantastic profits quickly because of the imbalances created during the transition. There is a temptation to see these early businessmen as pioneering capitalists blazing trails out of the Soviet system, but the oligarchs played an important role: They elbowed out the Communist Party elite and factory managers who resisted change. The oligarchs were also addicted to easy money. Economist Anders Aslund has pointed out that in early 1990 the Moscow free-market price of a package of Marlboro cigarettes was 30 rubles--the same price as a ton of crude oil. Those who could hustle the crude and sell it overseas at world prices reaped a windfall.

I have counted seven phases of accessing "easy money" since 1991, and it is the final phase that ought to get special attention. In 1997 and 1998, Western banks lent hundreds of millions of dollars to Russia's oligarchs and their empires, often without carefully checking the borrowers. One Russian banker told me recently that he really didn't need the $250 million he borrowed on global markets two years ago.

From the time they were young men, the new tycoons learned that their money was only safe abroad. They feared their own crazy, unreformed tax system, political instability, extortion and theft by their rivals. Over the years, capital was pumped out the door at a rate of $1 billion a month. For a country already lacking capital, the leaks were debilitating. The only real way to stop them was to create conditions inside Russia to attract capital, but its leaders had absolutely no willpower to make that happen. What's more, the Central Bank itself took part in capital flight, sending Russia's foreign currency reserves to an offshore tax haven.

The window of opportunity is closing in Russia: Millions of people have lost faith in the Western goals of market democracy, even as they struggle frantically to survive in it. There are three important ways for the United States to remain engaged. First is the business of democracy. Russians have stayed the course on elections. Now they need to build civil society, the glue that connects the rulers to the ruled. We know something about civil society--and we've done far too little to share that knowledge. Second, there's still an enormous amount of work on arms control and nonproliferation. The last, and most difficult, is the Russian economy, which is not yet completely out of control. Whether the problem is bandit capitalism or just chaos capitalism, much remains to be done to fix the system of corporate governance, to clean up a disastrous tax code, to help Russia break out of stagnation in agriculture and to deal with defense conversion. Most of it will have to be done by Russians themselves.

But we need to remind ourselves just how much Russia has changed. As a teenager in the early 1970s, I demonstrated for Soviet Jews' freedom in Washington's Farragut Square. In the '80s, I reported on President Reagan and his demands for systemic change in the Soviet Union. Now I sit in Moscow, thinking that in many ways Russians have accomplished much of what we asked. Have we run out of the imagination and energy to help them finish the job?